UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
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Commission file number 0-28656
KARRINGTON HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1461482
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
919 OLD HENDERSON ROAD
COLUMBUS, OH 43220
(614) 451-5151
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K: [X]
Shares of registrant's common shares, without par value, outstanding at March
24,1997 was 6,700,000. As of March 24, 1997, the aggregate market value of
the voting stock held by non-affiliates of the registrant was $35,519,000.
Documents Incorporated By Reference
The information required by Part II, Items 5 through 8, of Form 10K is
incorporated herein by reference to the registrant's Annual Report to
Shareholders for the year ended December 31, 1996. The information required
by Part III of Form 10K is incorporated herein by reference to the
registrant's definitive Proxy Statement relating to its 1997 Annual Meeting
of Stockholders to be held on May 13, 1997.
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1
PART I
ITEM 1. BUSINESS
The Company develops, owns and operates private pay, assisted living
residences. Assisted living residences provide housing and care for elderly
or frail individuals who, although generally ambulatory, need assistance with
one or more activities of daily living, such as bathing, grooming, dressing,
eating or personal hygiene.
In 1990, Richard R. Slager, the Company's Chief Executive Officer and
President, and Alan B. Satterwhite, the Company's Chief Operating Officer and
Chief Financial Officer, formed DevelopMed Associates, Inc., an Ohio
corporation ("DMA"), for the purpose of developing an assisted living
residence business. In 1991, DMA entered into a strategic alliance with JMAC,
Inc. ("JMAC"), an investment company owned by John H. McConnell and John P.
McConnell, the founder and the Chairman, respectively, of Worthington
Industries, Inc., pursuant to which alliance DMA and JMAC Properties, Inc.,
an Ohio corporation ("JMAC Properties"), which is a wholly-owned subsidiary
of JMAC, formed the Company's predecessor, Karrington Operating Company, an
Ohio general partnership ("Karrington Operating"). Prior to the consummation
of the reorganization transactions (as described below), JMAC Properties
owned a two-thirds equity interest in Karrington Operating, and DMA owned a
one-third equity interest.
Immediately prior to the Company's initial public offering in July 1996,
JMAC transferred to the Company all of its shares of JMAC Properties in
exchange for two-thirds of the pre-offering outstanding common shares of the
Company and the shareholders of DMA transferred all of their shares of DMA to
the Company in exchange for one-third of the pre-offering outstanding common
shares of the Company.
As of March 20, 1997, the Company has developed 26 residences in its
target markets, 10 of which are open and 16 of which are under construction
and scheduled to open in 1997 or by April of 1998. These 26 residences are
located in Ohio, Pennsylvania, Indiana, Colorado, North Carolina, Michigan
and New Mexico. As part of its nationwide expansion strategy, the Company has
sites for 14 residences under contract in these states, as well as in
Illinois, New York and California.
The prototypical Karrington assisted living model, which has been
developed and refined by the Company since its first residence was opened in
1992, is a mansion-style residence which houses 60 to 80 residents. Each
residence is typically located in a middle- to upper-income community which
has a well-established population of individuals 75 years of age and older.
The Karrington model combines quality housing, personal care and support
services to provide a cost-effective alternative for individuals with
physical frailties or cognitive disorders, such as Alzheimer's disease, who
do not require the regular skilled medical services provided by nursing
facilities. The Karrington model allows the Company to control development
costs, maintain consistent quality and improve operational effectiveness,
while also creating "brand" awareness in the Company's markets. The Company
has been successful in implementing the Karrington model, with residences
open for one year or more having an average occupancy rate of 94.3% and 96.4%
for the 12 months ended December 31, 1996 and 1995, respectively.
Karrington residences typically are staffed with licensed nurses on a
24-hour basis and are designed to permit residents to "age in place" within
the residence as they develop further physical or cognitive frailties. The
Company believes that it is able to care for individuals with higher acuity
levels (i.e., those needing greater assistance with activities of daily
living) than is typical in the assisted living industry.
In addition to its own development activities, the Company has entered
into a joint development relationship with Sisters of Charity Health Care
Systems, Inc. ("SCHCS"), a not-for-profit corporation of which the sole
member is Catholic Health Initiatives ("CHI"). CHI is a large,
not-for-profit health organization formed by the recent consolidation of
Catholic Health Corporation, SCHCS and Franciscan Health Systems. CHI
operates 61 hospitals and 50 long-term care facilities in 20 states and has
revenues exceeding $4 billion. The Company and CHI currently intend to
develop and operate assisted living residences with CHI's health care system.
See "Relationship with CHI."
By the end of 1999, the Company plans to have open approximately 77
Company-owned residences. As part of this plan, the Company will develop and
operate Karrington Place residences, which are assisted living residences
specifically designed for individuals with Alzheimer's disease and other
cognitive disorders, in a substantial portion of its markets. In addition,
the Company intends to develop and open 12 jointly-owned residences.
2
THE ASSISTED LIVING INDUSTRY
The assisted living industry has developed over the past decade to
provide a cost-effective residential alternative for elderly individuals who
do not require the intensive medical attention provided by a skilled nursing
facility but who cannot, or choose not to, live independently due to physical
frailty or cognitive disorders. It is estimated that the assisted living
industry has annual revenues of $15 billion. Assisted living represents a
combination of housing and 24-hour a day personal support services designed
to aid elderly residents with activities of daily living, such as bathing,
grooming, dressing, eating and personal hygiene. Assisted living residences
provide assistance to residents with limited medical needs and may provide
higher levels of personal assistance for special need residents, such as
incontinent residents or residents with Alzheimer's disease or other forms of
cognitive disorders.
The assisted living industry is fragmented and, to date, is characterized
by many small operators. The scope of assisted living services varies
substantially among operators, ranging from basic "board and care" services
to full service assisted living residences such as those operated by the
Company. Many smaller assisted living providers do not operate in residences
designed specifically for assisted living, do not have professionally trained
staffs and may provide only limited assistance with low-level care
activities. The Company believes there are few assisted living operators in
its markets who provide the same comprehensive range of assisted living
services, such as Alzheimer's care and other special care programs, as the
Company.
The Company believes that the following factors should continue to
positively affect the assisted living industry:
CONSUMER PREFERENCES. The Company believes assisted living is increasingly
the alternative preferred by prospective residents and their families in
providing care for the frail elderly. Assisted living residents have greater
independence, and assisted living services allow them to "age in place" in a
residential setting. The Company believes these factors result in a higher
quality of life than that experienced in the more institutional or clinical
settings, such as skilled nursing facilities.
POSITIVE DEMOGRAPHIC CHANGES. According to the U.S. Bureau of Census, the
number of individuals in the United States 85 years and older is expected to
increase by approximately 43% during the 1990s, from 3.0 million in 1990 to
an estimated 4.3 million in 2000, as compared to total U.S. population growth
of approximately 11% during the same period. It is further estimated that
approximately 57% of the population of seniors over age 85 currently need
assistance with activities of daily living and that more than one-half of
seniors are likely to develop Alzheimer's disease or other cognitive
disorders by age 85.
ASSISTED LIVING DEMAND EXCEEDS SUPPLY. The supply of long-term care beds per
1,000 individuals 85 years of age and older declined from 686 beds per
thousand to 604 beds per thousand between 1980 and 1991, according to the
U.S. Bureau of Census, and the Company expects this trend to continue. The
Company believes this decline is attributable to several factors. The
majority of states in the United States have adopted certificate of need
("CON") or similar statutes which generally require that, prior to the
addition of new beds, the addition of new services or the making of certain
capital expenditures, a state agency must determine that a need exists for
the new beds or the proposed activities. The Company believes that this CON
process tends to restrict the supply and availability of licensed nursing
facility beds. High construction costs, limitations on government
reimbursement for the full costs of construction and start-up expenses also
act to constrain growth in the supply of such facilities and beds. At the
same time, nursing facility operators are focusing on patients requiring
higher levels of nursing care which results in fewer nursing beds being
available to patients with lower acuity levels.
COST ADVANTAGES. The Company believes that the assisted living industry can
provide comparable services for significantly less than the cost of such
services to private pay residents in nursing facilities. The Company's market
research indicates that the Company provides services at a cost of 25% to 35%
less than the cost of comparable services provided by private intermediate
care nursing facilities in the same market.
CHANGES IN FAMILY COMPOSITION. As a result of the increasing number of
two-income families, the high divorce rate and the number of single-parent
households, as well as the increasing geographic dispersion of families, many
adult children are not available to care in their own homes for elderly
parents. Two-income families are, however, often better able to provide
financial support for elderly parents.
COST CONTAINMENT PRESSURES. Responding to rising health care costs,
governmental and private payor sources have adopted cost containment measures
that have encouraged reduced lengths of stay in hospitals. A result of this
trend is an
3
increase in the number of individuals receiving nursing facility care as
compared to hospitalization. That, in turn, causes nursing facility operators
to focus on improving occupancy and increasing services to residents
requiring high levels of nursing care. As the level of care for nursing
facility residents rises and the supply of nursing facility space is filled
by residents having more acute needs, the Company believes that there will be
greater demand for assisted living residences to provide for residents
requiring less nursing care than generally will be provided to residents in
nursing facilities.
STRATEGY
The principal components of the Company's strategy are to:
DEVELOP KARRINGTON MODEL RESIDENCES IN CURRENTLY-SERVED AND NEW COMMUNITIES.
The Company's plans call for rapid development of the Karrington model in the
communities it currently serves, as well as expansion into additional
communities. The Company targets middle-to upper-income metropolitan markets
which have well-established populations of persons 75 years of age and older.
This development activity, in conjunction with the Company's acquisition
strategy (discussed below) and its relationship with CHI, is intended to
result in regional concentrations of assisted living residences. The
Company's ultimate objective is to develop a nationwide network of assisted
living residences which will be utilized by managed care companies.
EXPAND JOINT DEVELOPMENT RELATIONSHIPS WITH MAJOR HEALTH CARE SYSTEMS ACROSS
THE UNITED STATES. The Company believes that it will continue to benefit
from its relationship with CHI, pursuant to which the Company expects to
develop and operate, and jointly own with CHI, assisted living residences in
communities where CHI or its affiliates have a major presence as a health
care provider. In addition, the Company believes its relationship with CHI
provides a significant source of referrals and the opportunity to leverage
the Company's expertise by developing similar relationships with other large,
primarily not-for-profit, health care systems throughout the country.
CONTINUE ITS FOCUS ON PROVIDING A BROAD RANGE OF SERVICES TO HIGHER-ACUITY
RESIDENTS. The Company believes it provides a higher acuity level of care to
its residents than is typically available at assisted living facilities,
including care for individuals with Alzheimer's disease and other cognitive
disorders. The Company is able to provide these services by building its
residences to higher standards and specifications, hiring licensed
professionals, providing advanced training to its staff and complying with
relevant regulations. In addition to providing care to residents with more
complex medical conditions, the Company seeks to offer a broad range of
services to meet the varied needs of all of its residents. In the future,
these services are expected to include physical, occupational, speech and
other rehabilitation therapy programs and other resident services. By
providing a higher level of care and a broader spectrum of services, the
Company is able to allow its residents to "age in place." The Company also is
able to provide these services at rates which are substantially less than the
cost of similar services provided by nursing care facilities.
ACQUIRE RESIDENCES FOR CONVERSION TO THE KARRINGTON MODEL. The Company
intends to acquire assisted living residences or other properties that can be
effectively converted to the Karrington model of operation. These
acquisitions will depend on location, financial feasibility, suitability for
conversion and consistency with other standards and requirements. The Company
also intends to pursue long-term management contracts where opportunities
exist to expand the Company's operations or to facilitate the acquisition of
residences.
RELATIONSHIP WITH CHI
In addition to its own residence development activities, the Company and
Catholic Health Initiatives contemplate the joint development of a
significant number of assisted living residences, three of which are open at
the end of 1996. The genesis of the CHI relationship was the joint
development by the Company and SCHCS of Karrington of Oakwood, a 53-unit
assisted living residence located in the Dayton, Ohio area which opened in
November 1994. Following the success of the Karrington of Oakwood residence,
the Company and CHI determined to expand their relationship and in 1995
entered into a letter of intent relating to the joint development of six
additional projects over a three-year period. The first of the six projects
consists of a 61-unit assisted living residence and an adjacent 28-unit
Alzheimer's and cognitive disorder residence located in Albuquerque, New
Mexico, which opened in October 1996. Three additional residences are
currently under construction in Cincinnati and Dayton, Ohio and Colorado
Springs, Colorado.
Each project is owned jointly by the Company and CHI, with CHI typically
owning approximately 80% of the equity of the project. Construction and
permanent debt financing generally is arranged by CHI on behalf of the
venture and is non-recourse to the Company.
4
The Company provides all development and management services with respect to
each residence under a standard agreement that generally provides for a
development fee of $250,000 and a management fee of 5% of revenues.
SERVICES AND OPERATIONS
SERVICES PROVIDED
Seventy-five percent of Karrington residents are females and the average
age of all residents is 83. Most Karrington residents have some disability
associated with aging, such as dementia, Alzheimer's disease, arthritis,
nutritional problems, incontinence, strokes or other disorders, and need
assistance with two or more activities of daily living. Residents needs
generally fall into one or more of the following categories: (i) requiring
physical support or assistance with activities of daily living; (ii)
requiring assistance, reminders and cuing due to some cognitive impairment;
and (iii) requiring socialization and interaction with others.
Residents generally pay a daily suite rental rate under a resident
agreement which is renewable annually and cancelable with 30 days notice. The
daily suite rental rate ranges from $34 to $123 per day, depending on unit
size, location, number of occupants and level of care required. Approximately
70% of Karrington's residents live in private suites. While the Company's
average daily suite rental rate is approximately $77, the wide range of rates
offered by the Company allows the Company to accommodate persons of varying
financial resources. Medication administration and various levels of extended
care services, which depend on the degree of frailty, add to the basic rate.
Additional charges may be incurred for other services such as hair care and
special diets. Currently, all residents are private pay.
The Company's basic care program is provided to all residents at no
additional cost and includes: assistance with daily living, such as eating,
bathing, grooming, dressing and personal hygiene; three meals per day served
in a common dining room; 24-hour security; emergency call systems in each
unit and living area; transportation to offices, stores and community
services; assistance with arranging outside services such as physician care,
various therapy programs and other medical services; personal laundry
services; housekeeping services; and social and recreational activities.
In addition to the basic care program, residents may be included in the
extended care program, which assists residents who require more frequent or
more intensive assistance or care. Prior to entering a Karrington residence,
and periodically during their stay, individuals' needs are assessed to
determine the level of extended care services required, and an individual
care plan is designed. The Company's experience is that approximately 90% of
its residents require some extended care services or require medication
administration.
The Company's Alzheimer's and other cognitive disorder programs are
provided in each prototype residence on a designated "special care" floor.
The Company also develops Karrington Place residences designed specifically
for Alzheimer's disease care. Trained staff provide special care programs for
cognitively impaired residents, and each is charged additional daily fees for
this added support. Programs include added assistance, stimulation, special
activities, intervention and therapeutic programs that are developed and
supported by physicians specializing in dementia care that consult with the
Company.
STAFFING
Each residence has an Administrator and a four-person management team.
This management team includes the Resident Care Director (who supervises all
resident support staff and care plans), a Registered Nurse (responsible for
all wellness programs, as well as medication programs), the Director of
Administration (responsible for general administrative duties, including
housekeeping, and all food service and dietary needs) and the Associate
Administrator (involved in operations and marketing). Residence management
teams report to a regional director responsible for the operation of several
residences. Regional directors provide support, oversight and mentoring to
each residence's staff.
Staffing models are used to determine appropriate personnel levels.
Screening is used to help select staff with "care providing" characteristics.
For each residence, services are typically provided by a staff of
approximately 28 full-time equivalents. The largest staff component is
"Resident Assistants," who include licensed practical nurses and other
trained staff members who are responsible for administering services to
residents.
The Company maintains competitive compensation programs, including
incentives and quarterly profit sharing,
5
which it believes help attract and retain excellent employees. The Company
believes that the combination of proper interviewing, selection methods and
review, training and appropriate incentives significantly reduces hiring and
retraining costs and allows for a more stable, long-term work force. All
employees participate in a recruitment and development program called the
Predictive Index-Registered Trademark-, a third-party program which is
focused on determining key criteria and personal attributes which the Company
believes are important to the proper placement of staff and management.
TRAINING AND QUALITY ASSURANCE
The Company provides its personnel with an extensive and innovative
training program. This training covers all aspects of Karrington's operation.
At the end of a 90-day probationary period, each new employee is evaluated
for permanent placement. Additionally, the Company has an extensive
manager-in-training ("MIT") program which provides classroom and on-the-job
training to develop future Karrington administrators and managers. The
Company believes investment in the MIT program is vital to its continued
growth, quality control and consistency of service delivery.
The Company has structured a comprehensive quality assurance ("QA")
program intended to maintain standards of care established for each
residence. Under the Company's QA program, the care and services provided at
each residence are monitored by the professional services staff which reports
directly to the Company's senior management. The QA team works with residence
management teams to assure that all staff members are trained, that clinical
policies and procedures are followed, and that all state and federal
standards are met while achieving the stringent requirements of the Company.
The Company's QA program helps support compliance with federal and state
regulations and requirements for licensing. Karrington has also developed a
Quality of Service program which includes periodic surveys and follow-up with
all current and former residents and responsible parties.
DEVELOPMENT
The Company's development personnel research and identify potential
markets, primarily in major metropolitan areas and their surrounding suburban
communities, and select sites for development within such markets. In
evaluating a market, the Company considers a number of factors, including
population, income and age demographics, traffic count, site visibility,
residential and commercial characteristics, probability of obtaining zoning
approvals, proximity of various competitors, estimated market demand and the
potential to achieve economies of scale in a specific market by concentration
of its development and operating activities.
The principal stages in the development process are (i) site selection
and contract signing, (ii) zoning and site plan approval, (iii) architectural
planning and design, (iv) contractor selection and (v) construction and
licensure. Once a market has been identified, site selection and contract
signing typically take three months. Zoning and site plan approval generally
take three to nine months and are typically the most difficult step in the
development process as a result of the Company's selection of sites in
established communities which frequently require site rezoning. Architectural
planning and design and contractor selection often occur during the zoning
process but can prolong the start of construction. Residence construction
generally takes 12 months. After a residence receives a certificate of
occupancy and appropriate licenses, residents usually begin to move in
immediately. The Company's experience indicates that new residences typically
reach a stable level of occupancy of over 90% within 12 months, but there can
be no assurance that these results will be achieved in new markets. The
Company estimates that total capitalized cost to develop, construct and open
a Karrington model residence, including land acquisition and construction
costs, ranges from approximately $6.0 million to $7.5 million, an average
cost per unit of approximately $110,000. The cost of any particular residence
may vary considerably based on a variety of site-specific factors.
The Company's development activities are coordinated by its 16-person
development staff, which has extensive real estate acquisition, design,
engineering, zoning, general construction and project management experience.
Architectural design and hands-on construction functions are usually
contracted to experienced outside architects and contractors.
The Company's construction strategies include the development of national
purchasing contracts for major building components and the retention of
several regional contractors engaged to construct its residences. The Company
believes these approaches will help reduce construction costs or mitigate the
rate of cost increases due to inflation, increase product quality, and
shorten construction periods that result from increased familiarity with the
architectural, engineering and construction design of the Company's prototype
residences.
6
ARCHITECTURAL DESIGNS
The Karrington model residence is a freestanding, mansion-style building
with a designed capacity of 60 to 80 residents in any of a variety of
exterior styles. The prototype averages 64 units and approximately 45,000
square feet and is generally built on a 1.5 to 2 acre site. Approximately 50%
of the building is devoted to common areas and amenities. The Company has
five basic building plan designs, which provide it with flexibility in
adapting the model to a particular site and local zoning requirements. The
building is usually three stories of concrete and steel frame construction
built to institutional health care standards but residential in appearance.
The interior design promotes a home-like environment while permitting the
effective provision of resident care programs and promoting resident
independence.
The individual resident suites are clustered on each floor to resemble a
neighborhood, with a variety of suite floor plans of one or two rooms and
varying square footage. Each floor has a quiet area resembling a library or
den and an active area designed to support activity programs and interaction
among residents, staff and families. The main floor usually includes the main
dining room, private dining rooms, administrative offices, a library, a
living or family room, an ice cream parlor and a year-round sun porch. Also
included are public restrooms, outside porches, a foyer and a formal entryway
with grand staircase and central elevator. On other floors in each residence
are located a resident laundry room, a wellness center, a bathing spa area,
employee break rooms, a beauty salon and activity areas. The special care
floor also includes a separate resident kitchen and dining area.
Recently, the Company opened two stand-alone Alzheimer's care residences
in Columbus, Ohio and Albuquerque, New Mexico designed specifically for
residents with Alzheimer's disease. The "Karrington Place" residences were
constructed using a special design concept intended to provide the atmosphere
and physical environment believed by the Company to be most effective in
assisting residents in the later stages of Alzheimer's disease. The Company
intends to develop additional Karrington Place models in many of the markets
it enters.
The architectural and interior design of the Karrington prototype
incorporates Karrington's philosophy of dedication to excellence in
preserving and enhancing personal dignity, independence, individuality and
quality of life. The Company believes that its residential environments
accomplish other objectives as well, including: (i) lowering the stress and
disruption of the resident and their family that occurs because of a move;
(ii) providing a secure environment that is easily traveled by residents with
a wide variety of ambulation disabilities; (iii) making available a
comfortable home-like environment that welcomes visitation by family and
friends; and (iv) supporting the Company's special activities programs that
promote inter-generational activities and events to bring together elderly
residents with younger persons in the community.
MARKETING
The Company's marketing approach emphasizes consumer education and
awareness directed to potential residents and family members. The adult
children of residents tend to be significant decision-makers in the selection
of the assisted living option. Other significant referral sources include
hospital discharge planners, physicians, churches, social service agencies
focused on the elderly, nursing facilities in the area, home health agencies,
social workers, legal advisors, other health care providers and families of
existing residents. Telephone directory advertising, media products and
informal "networking" are directed by the Company toward educating
decision-makers and other referral sources in a community. The marketing
personnel in the Company's corporate office develop the overall strategy in
each market as well as media materials, databases, direct mail, signage and
community outreach activities. Each residence has a marketing director
responsible for generating and following-up leads, coordinating referral
activities and providing tours, counseling and caregiving advice for
potential residents and their families with respect to the Company's
residences and services.
Marketing activities begin during the development stage of a residence,
after the Company has obtained site control, and continue with increased
emphasis when an information center opens for a specific residence
approximately eight months prior to opening. Historically, new residences
have achieved deposits on approximately 30% of the units in a residence prior
to opening, and residences have generally reached stable occupancy in
approximately 12 months.
REGULATION
The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, which requirements vary from state to state. These
requirements
7
address, among other things: personnel education, training and records;
facility services, including administration of medication and limited nursing
services; physical plant specifications; furnishing of residents' units; food
and housekeeping services; emergency evacuation plans; and residents' rights
and responsibilities. In several states in which the Company operates or
intends to operate, assisted living residences also require a certificate of
need before the residences can be opened. In most states, assisted living
residences are subject to state or local fire and building codes and food
service licensure requirements. Like other health care residences, assisted
living residences are subject to periodic survey or inspection by
governmental authorities. From time to time in the ordinary course of
business, the Company receives survey reports. The Company reviews such
reports and takes appropriate corrective action if deficiencies are noted.
Inspection deficiencies are resolved through a plan of correction, although
the reviewing agency typically is authorized to take action against a
licensed facility where deficiencies are noted in the survey process. Such
action may include imposition of fines, imposition of a provisional or
conditional license or suspension or revocation of a license or other
sanctions.
Health care is an area of extensive and frequent regulatory change. The
assisted living model for long-term care is relatively new, and, accordingly,
the manner and extent to which it is regulated at the federal and state
levels is evolving. Changes in the laws or new interpretations of existing
laws may have a significant effect on methods and costs of doing business.
The Company is actively involved in monitoring regulatory and legislative
changes affecting the assisted living industry and participates with industry
organizations to encourage improvements to existing laws and regulations.
The success of the Company will depend in part upon its ability to
satisfy applicable regulations and requirements and to procure and maintain
required licenses as the regulatory environment for assisted living evolves.
The Company's operations could also be adversely affected by, among other
things, future regulatory developments such as mandatory increases in the
scope and quality of care to be offered to residents and revisions to
licensing and certification standards.
The Company currently is not a Medicare or Medicaid provider. Under some
state licensure laws, and for the convenience of its residents, some of the
Company's assisted living residences maintain contracts with certain health
care providers and practitioners, including pharmacies, visiting nurses,
social service and home health organizations, through which health care
providers make their health care products or services available to residents.
Some of the services furnished by these contract parties may be covered by
the Medicare programs.
COMPETITION
The long-term care industry is highly competitive. The Company believes
the assisted living sector of long-term care, in which it operates, will
become even more competitive in the future. The Company competes with
numerous other companies providing similar long-term care alternatives such
as home health care agencies, community-based service programs, retirement
communities and convalescent centers, and other assisted living providers.
The Company expects that, as the providers of assisted living services
receive increased attention and the number of states providing reimbursement
for assisted living rises, competition will intensify as a result of new
market entrants. The Company also competes with skilled nursing facilities
that provide long-term care services. In implementing its growth strategy the
Company expects increased competition in its efforts to develop and acquire
assisted living communities. Some of the Company's present and potential
competitors are significantly larger and have, or may obtain, greater
financial resources than those of the Company.
PROPRIETARY INFORMATION
The Company is the registered owner of the service mark "Karrington
Communities-Registered Trademark-." The Company believes this mark is of
material importance to its business.
EMPLOYEES
As of March 14, 1997, the Company had approximately 430 employees. None
of the Company's employees are represented by a union or covered by a
collective bargaining agreement. The Company has experienced no work
stoppages and considers its relationship with its employees to be good.
8
ITEM 2. PROPERTIES
The following table sets forth certain information regarding Karrington
residences as of March 20, 1997:
Open Residences Ownership Metro Location Commenced Operations Units
- --------------- --------- -------------- -------------------- -----
Karrington of Bexley Owned Columbus, OH October 1992 53
Karrington on the Scioto Owned Columbus, OH March 1993 53
Karrington at Tucker Creek Owned Columbus, OH December 1993 54
Karrington of Oakwood (1) Jointly Owned Dayton, OH November 1994 53
Karrington of Shaker Heights Owned Cleveland, OH October 1995 59
Karrington Place (Alzheimer's Residence) Owned Columbus, OH February 1996 26
Karrington of South Hills Owned Pittsburgh, PA August 1996 67
Karrington of Albuquerque (1) Jointly Owned Albuquerque, NM October 1996 61
St. Francis Place (Alzheimer's Residence) (1) Jointly Owned Albuquerque, NM October 1996 28
Karrington at Fall Creek Owned Indianapolis, IN March 1997 61
Total units 515
---
---
Residences Planned
Under Construction Ownership Metro Location Planned Opening Date Units
- ------------------ ----------- -------------- -------------------- -----
Karrington of Kenwood (1) Jointly Own Cincinnati, OH 2Q, 1997 67
Karrington at Willow Lake Own Indianapolis, IN 3Q, 1997 61
Karrington of Englewood (1) Jointly Own Dayton, OH 3Q, 1997 48
Karrington of Colorado Springs (1) Jointly Own Colorado Springs, CO 3Q, 1997 64
Karrington of Fort Wayne Own Fort Wayne, IN 3Q, 1997 61
Karrington of Fremont Own Fremont, OH 4Q, 1997 48
Karrington of Wooster Own Wooster, OH 4Q, 1997 48
Karrington of Rocky River Lease Cleveland, OH 4Q, 1997 64
Karrington of Bath Lease Akron, OH 4Q, 1997 67
Karrington of Carmel Lease Indianapolis, IN 4Q, 1997 58
Karrington of Gahanna (Alzheimer's Residence) Lease Columbus, OH 4Q, 1997 50
Karrington at the Shawhan Own Tiffin, OH 4Q, 1997 55
Karrington of Findlay Own Findlay, OH 4Q, 1997 48
Karrington of Piper Glen Own Charlotte, NC 1Q, 1998 74
Karrington of Ann Arbor Lease Ann Arbor, MI 2Q, 1998 67
Karrington of Presque Isle Bay Own Erie, PA 2Q, 1998 69
Total units 949
---
---
Planned
Sites Under Contract Development Stage Metro Location Planned Opening Date Units
- -------------------- ----------------- -------------- -------------------- -----
Karrington of Eastover Zoned Charlotte, NC 2Q, 1998 88
Karrington of Monroeville Zoned Pittsburgh, PA 2Q, 1998 64
Karrington of Park Ridge Zoned Chicago, IL 2Q, 1998 111
Karrington of Poland Zoned Youngstown, OH 2Q, 1998 67
Karrington of Millcreek (Alzheimer's Residence) In Zoning Erie, PA 2Q, 1998 50
Karrington of Santa Rosa In Zoning Santa Rosa, CA 3Q, 1998 80
Karrington of Novato In Zoning Novato, CA 3Q, 1998 80
Karrington of Cincinnati (1) In Zoning Cincinnati, OH 3Q, 1998 67
Karrington of Parma In Zoning Cleveland, OH 3Q, 1998 67
Karrington of Mt. Lookout (1) Zoned Cincinnati, OH 4Q, 1998 70
Karrington of Williamsville In Zoning Buffalo, NY 4Q, 1998 67
Karrington of Winston-Salem In Zoning Winston-Salem, NC 4Q, 1998 67
Karrington of Upper St. Clair In Zoning Pittsburgh, PA 4Q, 1998 67
Karrington of Farmington Hills In Zoning Detroit, MI 4Q, 1998 67
Total units 1,012
-----
-----
(1) Joint venture with CHI.
9
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information required by this Item 5 is contained on page 27 of the
Company's Annual Report to Shareholders for the year ended December 31, 1996
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item 6 is contained on page 26 of the
Company's Annual Report to Shareholders for the year ended December 31, 1996
and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by this Item 7 is contained on pages 9 through 12 of
the Company's Annual Report to Shareholders for the year ended December 31,
1996 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and Report of Independent Auditors required by
this Item 8 are set forth as indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 is contained under the captions
"Election of Directors", "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement
relating to its 1997 annual meeting of Shareholders and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is contained under the captions
"Executive Compensation" and "Election of Directors - Compensation of
Directors" in the Company's definitive Proxy Statement relating to its 1997
annual meeting of Shareholders and is incorporated herein by reference.
Neither the report of the Compensation Committee of the Registrant's Board of
Directors on executive compensation nor the performance graph included in the
Registrant's definitive Proxy Statement relating to the annual meeting of
Shareholders shall be deemed to be incorporated herein by
10
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is contained under the caption
"Beneficial Ownership of Company Securities" in the Company's definitive
Proxy Statement relating to its 1997 annual meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is contained under the caption
"Certain Relationships and Related Party Transactions" in the Company's
definitive Proxy Statement relating to its 1997 annual meeting of
Shareholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)&(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See index to financial statements and financial statement schedules at
page F-1.
(3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ------------
3.1 Form of Amended Articles of Incorporation
of the Company (1)
3.2 Form of Code of Regulations of the Company (1)
10.1 1996 Incentive Stock Plan * (1)
10.2 Loan Agreement between the Company and JMAC
dated December 29, 1995 (1)
10.4 Registration Rights Agreement dated
May 8, 1996, by and among the Company and
the Investors (as defined therein) (1)
10.5 Reorganization Agreement dated May 8, 1996,
by and among the Company and the Investors
(as defined therein) (1)
10.6 Letter of Intent Dated April 29, 1996, by
and between the Company and Sisters of
Charity Health Care Systems, Inc. (1)
13 Annual Report to Shareholders (2)
21 Subsidiaries of the Registrant (1)
23.1 Consent of Ernst & Young LLP (2)
23.2 Consent of Deloitte & Touche LLP (2)
24.1 Power of Attorney - Richard R. Slager (2)
24.2 Power of Attorney - Alan B. Satterwhite (2)
24.3 Power of Attorney - Mark N. Mace (2)
24.4 Power of Attorney - Charles S. McCreary (2)
11
24.5 Power of Attorney - John S. Christie (2)
24.6 Power of Attorney - Bernadine P. Healy (2)
24.7 Power of Attorney - David H. Hoag (2)
24.8 Power of Attorney - John P. McConnell (2)
24.9 Power of Attorney - James V. Pickett (2)
24.10 Power of Attorney - Harold A. Poling (2)
24.11 Power of Attorney - Michael H. Thomas (2)
24.12 Power of Attorney - Robert D. Walter (2)
27 Financial Data Schedule (2)
_______________
(1) Included as an exhibit by the same number in the Company's
Registration Statement on Form S-1 (File No. 333-03491) and
incorporated herein by reference.
(2) Filed Herewith.
* Management contract or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on November 12, 1996 reported under Item 5, a press
release dated the same date and included as an exhibit to the 8K,
announcing the execution of a letter of intent to acquire the business of
Kensington Management Group, Inc.
(C) EXHIBITS
Exhibits filed with this Annual Report on Form 10-K are attached hereto.
For a list of such exhibits, see Item 14 (a) (3).
(D) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are required because the required
information to be set forth therein is not applicable.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Karrington Health, Inc.
By: /S/ RICHARD R. SLAGER
---------------------------
Richard R. Slager
Chairman of the Board
Date: March 28, 1997
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ RICHARD R. SLAGER Chairman of the Board, President March 28, 1997
- ------------------------------ and Chief Executive Officer
Richard R. Slager (Principal Executive Officer)
/S/ ALAN B. SATTERWHITE Chief Operating Officer, Chief March 28, 1997
- ------------------------------ Financial Officer and Director
Alan B. Satterwhite (Principal Financial Officer)
/S/ MARK N. MACE Senior Vice President, Finance March 28, 1997
- ------------------------------ and Treasurer (Principal
Mark N. Mace Accounting Officer)
/S/ CHARLES H. MCCREARY Secretary and Director March 28, 1997
- ------------------------------
Charles H. McCreary
/S/ JOHN S. CHRISTIE Director March 28, 1997
- ------------------------------
John S. Christie
/S/ BERNADINE P. HEALY, M.D. Director March 28, 1997
- ------------------------------
BERNADINE P. HEALY, M.D.
/S/ DAVID H. HOAG Director March 28, 1997
- ------------------------------
David H. Hoag
/S/ JOHN H. MCCONNELL Director March 28, 1997
- ------------------------------
John H. McConnell
/S/ JAMES V. PICKETT Director March 28, 1997
- ------------------------------
James V. Pickett
/S/ HAROLD A. POLING Director March 28, 1997
- ------------------------------
Harold A. Poling
/S/ MICHAEL H. THOMAS Director March 28, 1997
- ------------------------------
Michael H. Thomas
/S/ ROBERT D. WALTER Director March 28, 1997
- -------------------------------
Robert D. Walter
13
KARRINGTON HEALTH, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 14 (a) (1) AND (2) )
1. DESCRIPTION OF FINANCIAL STATEMENTS
---------------------------------------------------
The following are incorporated by reference in this Page(s) in 1996
Annual Report on Form 10-K for the year ended Annual Report to
December 31, 1996 Shareholders
-------------------
Report of Independent Auditors (Ernst & Young LLP) 13
Consolidated Balance Sheets 14
Consolidated Statements of Operations 15
Consolidated Statements of Equity 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18-25
Page
--------
Independent Auditors' Report (Deloitte & Touche LLP) F-2
2. FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are required because the required
information to be set forth therein is not applicable.
F-1
INDEPENDENT AUDITORS' REPORT
To the Owners of
Karrington Operating Company:
We have audited the consolidated balance sheet of Karrington Operating
Company and affiliates as of December 31, 1994 (not incorporated in this Form
10-K), and the related consolidated statements of operations, owners' equity
(deficiency), and cash flows for the year then ended (incorporated herein).
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made my management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Karrington Operating Company and
affiliates at December 31, 1994, and the results of their operations and
their cash flows, for the year then ended in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
January 24, 1995
F-2
KARRINGTON HEALTH, INC.
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------
3.1 Form of Amended Articles of Incorporation
of the Company (1)
3.2 Form of Code of Regulations of the Company (1)
10.1 1996 Incentive Stock Plan * (1)
10.2 Loan Agreement between the Company and JMAC
dated December 29, 1995 (1)
10.4 Registration Rights Agreement dated
May 8, 1996, by and among the Company and
the Investors (as defined therein) (1)
10.5 Reorganization Agreement dated May 8, 1996,
by and among the Company and the Investors
(as defined therein) (1)
10.6 Letter of Intent Dated April 29, 1996, by
and between the Company and Sisters of
Charity Health Care Systems, Inc. (1)
13 Annual Report to Shareholders (2)
21 Subsidiaries of the Registrant (1)
23.1 Consent of Ernst & Young LLP (2)
23.2 Consent of Deloitte & Touche LLP (2)
24.1 Power of Attorney - Richard R. Slager (2)
24.2 Power of Attorney - Alan B. Satterwhite (2)
24.3 Power of Attorney - Mark N. Mace (2)
24.4 Power of Attorney - Charles S. McCreary (2)
24.5 Power of Attorney - John S. Christie (2)
24.6 Power of Attorney - Bernadine P. Healy (2)
24.7 Power of Attorney - David H. Hoag (2)
24.8 Power of Attorney - John P. McConnell (2)
24.9 Power of Attorney - James V. Pickett (2)
24.10 Power of Attorney - Harold A. Poling (2)
24.11 Power of Attorney - Michael H. Thomas (2)
24.12 Power of Attorney - Robert D. Walter (2)
27 Financial Data Schedule (2)
- ----------------
(1) Included as an exhibit by the same number in the Company's
Registration Statement on Form S-1 (File No. 333-03491) and
incorporated herein by reference.
(2) Filed Herewith.
* Management contract or compensatory plan or arrangement.